Ethics board caves in to pressure on commissions

The Accounting Professional and Ethical Standards Board has caved in to industry pressure and will allow accountants to charge asset-based fees on financial planning products, but has introduced additional safeguards to protect consumers, closing loopholes in Labor’s Future of Financial Advice reforms.

Treasury blocked financial planners from charging fees based on a percentage of assets under management in a fund from July 1, 2013, but only if the product is geared, or funded using debt.

If investments are funded out of savings, asset-based fees or third party payments are allowed.

But in the release of its APES 230 Financial Planning Services standard last Friday, the ethics board has imposed three additional safeguards on ungeared funds, the most stringent being that accountants must obtain “informed consent" from clients.

APESB chairman Kate Spargo said: “Informed consent is an established legal principle that requires a higher standard than simple disclosure.

“Informed consent requires that the client has a clear appreciation and understanding of the relevant facts in relation to the charging for services, as well as the implications of what the client is agreeing to. Some clients may not have the capacity to provide informed consent," she said.

“The accountant must also form a view about the level of understanding of his or her client. In the event of any challenge the reasonableness of this view would be assessed by an adjudicating body on an objective basis."

The release of APES 230 follows more than five years’ of consultation.

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The board caused a controversy last year by suggesting accountants should not glean commissions on the sale of insurance or mortgage products – products many accountants rely on to prop up cash flow while equity markets recover.

“Common sense has prevailed," said Michael Spurr, chief executive of Countplus, a group of 21 firms, 17 of which derive a healthy portion of income from financial planning advice.

“The original proposal would have destroyed value for established businesses and also effectively forced them out of the insurance and mortgage market. These changes put the standard in line with the FOFA changes so accounting-based businesses can compete on a level playing field," he said.

CPA Australia chief executive Alex Malley said “the new professional standard requires higher levels of professional service and disclosure than the law". For starters it captures all clients, not just retail investors. Also, the “best interest" obligation relates to all financial planning advice, including insurance and mortgages – a much broader definition than that under FOFA. It also closes another substantial gap in federal regulations relating to grandfather arrangements. “Accountants can’t grandfather all existing clients," said APESB technical director Channa Wijesinghe.

“As soon as an existing client comes in to change anything in the new period, they get caught by this new standard. They will all be caught sooner or later because people are always doing something to their investments. Over time it will bring people into the tent."

Accountants must also supply an annual disclosure statement on ungeared products and obtain a written opt-in from clients every two years.